Markets have existed for centuries which allow people to buy and sell securities (e.g., stocks, futures, options, commodities, etc.) from one another. Today, examples of these markets in the United States are: The New York Stock Exchange (NYSE), The National Association of Security Dealers Automated Quotation (NASDAQ) System, and The American Stock Exchange (AMEX). These modern security markets facilitate the exchange of over two billion shares of stock every business day.
In making its buying decision and executing upon those, a large investor, such as an insurance company, typically has relationships with 40 to 80 brokerage firms. Some of these brokers have excellent research services while others have excellent execution service. Thus the large investor will use some to provide it research to determine stocks to be traded (the research broker) and others to perform the trades (the executing broker). Both brokers need to be paid for the system to work and it would be more profitable to a broker if it preformed both services.
Investors, for historical reasons, have paid their brokers only through trading commission. Thus only the trading broker received payment. To compensate the research broker, the buy side broker “steps out” part of its trade to the research broker. This step-out process is undertaken through the clearing process where some of the shares executed in a trade are allocated to the research broker.
As an illustration, executions are currently sent back electronically to the buy-side trader from the executing venue, as illustrated in FIG. 1.
This process creates a problem for the buy-side trader. The step-out process reveals the buy side trader's exact trading information to the research broker. The research broker can use or “leak” this information to the market, causing the buy-side trader to receive less favorable prices. This information leakage also gives the research broker inside knowledge about the buy-side trading strategy, enabling the research broker or other unintended parties to benefit from the order flow at the expense of the buy-side trader.
Accordingly what is needed is a method for automatically providing to the research broker a commission in a manner that eliminates information leakage from the buy-side to the research broker.